The Business Owner’s Number One Tool for Improving Cash Flow

Last week our entry was about getting two perspectives from your business in QuickBooks by using the Accrual and Cash Basis reporting options. This week as promised I am going to provide an overview of the Statement of Cash Flows. Next week I will talk about how you can use it to help you better run your business.

The Statement of Cash Flows reports on changes so each category reflects how much more or less the item was from the prior period. Sometimes these changes are referred to as “Sources of Cash” and “Uses of Cash” or another similar set of names. Either way these changes impact your cash position for example if your Inventory increased because you bought some more, it would be reported as a “Use of Cash”. If it decreased because some was sold, it would be reported as a “Source of Cash”. Sometimes the impact is direct and for every dollar more of one, you would see an offsetting dollar of the other like when you immediately pay for your inventory. Other times it is not so direct, like when you buy inventory but don’t pay for it until the next month and instead your accounts payable increases.

The statement is broken down into 3 distinct sections:

Operating Activities – As the name of the section indicates items here are influenced by the decisions you make on a daily basis and therefore, this is where your greatest focus should be. This is the section that best helps you see the difference between reports that are run using the Cash Basis and Accrual Basis.

Investing Activities – Groups together the impact of decisions that you made related to how you invest in the growth of your business. If you buy large assets, this is where they are reflected. Most likely there is less activity here than in Operations section.

Financing Activities – This is where money that is invested or lent/paid back to or form the business gets reported. If there are dividends or owner distributions, they would show up in this section.

As mentioned above the “from Operations” section is where our main focus should be so next week we will dig into that section and briefly go over how your actions can influence it.

The Shared Finance Center provides outsourced accounting and CFO support to small business owners and in doing so we heavily focus on helping to maximize cash flow. If you think that this post would be helpful to anyone you know, please pass it along.